For all its limitations, the free market does a pretty good job of allocating resources, particularly if all the costs and benefits are taken account of. The promised $3 billion subsidy from Wisconsin taxpayers to Foxconn represents a massive intervention in the private sector. Thus it appropriate to examine whether its benefits outweigh the costs.

Although the FoxConn subsidy dwarfs previous ones, it is hardly the first of its kind in Wisconsin. The Wisconsin Democracy Campaignlists previous recipients of Wisconsin tax credits (under both the Doyle and Walker administrations) and compares them to the political contributions from employees of these companies. (I did not include $286,000 from the owners of Uline to Scott Walker; including it squeezes the vertical scale sufficiently to make the other donations disappear.)

Tax Credits vs. Political Contributions

Such targeted tax credits are often derided as “corporate welfare.” For example see this list of handouts from the libertarian Beacon Center of Tennessee. “Since 2005, Tennessee governments have spent $3 billion on corporate welfare for 470 companies. The center calculates that only 3% of Tennessee’s 170,000 businesses have benefited from the state’s largesse.

There are several reasons to be concerned about such corporate welfare. One is that reduces the funds available for other activities. For example, a 2015 revision to the Governmental Accounting Standards, called GASP 77, “requires disclosure of tax abatement information about (1) a reporting government’s own tax abatement agreements and (2) those that are entered into by other governments and that reduce the reporting government’s tax revenues.”

A second concern is that targeted tax abatements redistribute income upwards–from middle income taxpayers to wealthy owners of companies. From the taxpayer viewpoint, a contest between states to see who can offer the highest subsidy is a negative sum game.

Finally, such targeted tax subsidies raise the prospect of pay to play, the belief among business that a political contribution to elected officials may improve the chances of getting a subsidy. This is implied in the connection that the Wisconsin Democracy Campaign makes between political donations and the tax credits. I am confident that, if pressed, all the donors would protest that they were only motivated because they agreed with the candidate on the issues. Yet it is worth noting that from an investment viewpoint the return is extremely attractive; on average, the donors got back $821 in Wisconsin tax credit for every dollar they contributed. It is hard to believe that every one of the contributors ignored this calculation.

In addition to tax credits targeted to specific companies, Wisconsin has phased in a tax credit aimed at two business sectors: manufacturing and agriculture. In a memo released earlier this year, the state Legislative Fiscal Bureau estimated the cost of the tax credit, as shown below. Since its start, the tax credit has cost state government $767.4 million in lost revenue and is now set to cost in excess of $300 million per year.

Cost of Manufacturing & Agriculture Credit

In a separate memo, the LFB calculated which individual returns received the bulk of the credit. 92 percent of the benefit went to individuals making over $300,000. 10 percent went to eleven taxpayers.

These subsidies to very wealthy individuals came at a time that state aid for Milwaukee and local governments was being cut, leading to increased local property taxes and fees, the only other funding sources available. Did these costs at least lead to increased manufacturing employment?

The next charts show manufacturing employment over the years in Wisconsin (the solid line) and four other Great Lakes states–Illinois, Michigan, Indiana, and Ohio. Manufacturing employment in the region generally declined through early years of the 21st Century and was pummeled by the Great Recession.

Manufacturing Jobs Since 2000

Since the recession manufacturing jobs have either stabilized or grown modestly, as the next graph shows. This is also the period when Wisconsin’s manufacturing tax credit phased in. Based on these data from the Bureau of Labor Statistics, it is very hard to spot a jobs effect of the manufacturing credit. To argue that it had a significant effect one must believe that without the credit, Wisconsin would have lagged even further behind its neighbors.

Manufacturing Jobs Since 2011

Why has manufacturing gotten so much attention? One argument is that manufacturing jobs are particularly good jobs. Here is Wisconsin Manufacturers and Commerce (WMC) arguing for the manufacturing tax credit: “Manufacturing jobs in Wisconsin compensate an average of $68,878, which is 44% higher than the average job in the state.” WMC does not say how it arrived at this figure, nor whether new manufacturing jobs are likely to command this level of compensation.

In fact, as shown on the next graph shows, data from the Bureau of Labor Statistics contradicts the WMC’s claim. It shows average hourly wages for manufacturing workers in the five Great Lakes states. I adjusted the data so that they are shown in 2017 dollars. Wages in all five states appear to be converging at $20 per hour. This is roughly equivalent to $40,000 per year, ignoring overtime.

Hourly Earnings for Manufacturing Workers in 2017 dollars

The deal with Foxconn has stunned many in the business world. For one thing, the announced cost of $3 billion works out to $500 for every man, woman, and child in Wisconsin. In addition Foxconn’s taxes would already have been eliminated by the tax credit for manufacturing and agriculture. Rather than paying taxes, Foxconn would receive an estimated payment of $300 million per year from Wisconsin taxpayers.

It is still unclear how big the taxpayers’ ultimate exposure will be. In addition to the two tax credits, local governments will be on the hook for new infrastructure. This comes at a time when both Wisconsin and local governments are challenged to keep up with crumbling existing infrastructure.

The richness of the offer to Foxconn likely reflects the relative strengths of the negotiators. Governor Scott Walker, President Donald Trump, and Representative Paul Ryan all needed a win, something they could point to as creating jobs. Being unable to walk away from a deal puts one in a weak negotiating position.

Foxconn’s record of coming through on their commitments is spotty at best. As has been widely noted, it has announced a number of plants that were never built, including a $30 million plant in Pennsylvania. The picture below, taken a few days ago from Google maps, shows Foxconn’s Pennsylvania facility. As Crain’s Detroit comments: “But it needs to be noted that Foxconn Technology Group, formally Hon Hai Precision Industry Co. Ltd., has a history of big promises with little to no payoff in the United States.”

Foxconn’s Pennsylvania facility

Among the unknowns is to what extent the Foxconn facility would alleviate the persistent poverty in parts of Kenosha, Racine, and Milwaukee. Presumably hiring at the Uline and Amazon facilities would throw light on this question, but so far as I can tell no one has looked into the question.

Reports in the Journal Sentinel indicate that legislation authorizing the tax credits would also exempt the project from wetland and other environmental regulations. If true, this would be a very disturbing precedent.

As more information becomes available, including the actual text of any agreement and the solidity of Foxconn’s commitments, these and other issues need to be explored.

More broadly, does the Foxconn plant, as planned, move Wisconsin in the direction it needs to go? Although Walker has taken to calling the project “Wisconn Valley,” suggesting a new Silicon Valley in Southeast Wisconsin, it seems to have more in common with the rust belt strategy of huge factories. By investing so heavily in one employer, it recreates the vulnerability that devastated Wisconsin and its peers along the Great Lakes, and left the region without the flexibility to respond to changes in the economic environment.

No mention of how much subsidized money was lost in the Pennsylvania promise of a $30 million dollar Fox con factory. Could it be zero dollars. Local business, the Marcus Corporation keeps dragging out a proposed Movie theater and Corporate offices on Water and Knapp street. Every year its proposed and it never quite materializes. What is next from the Left? Will they accuse the Fox con CEO of killing his wife. He is already seen as a man who poisons and rapes mother nature. Yet, these same lefties carry Fox con equipment in the palms of their hands and view their technology through every Game of Thrones episode. Terry Guao is a white walker.

You know, I cheerfully pay taxes because I believe it’s the the price we must all pay for the benefit of living in a civilized society that takes care of its most vulnerable and attempts to create equal opportunities for all.

But $500 for EACH person in the state? Plus the exemptions to certain laws that they’ve been granted, the enormous tax breaks, and all of the unknown costs to the local governments closest to the Foxconn site??? With no guarantee that they’ll stay here?

The idea of new jobs sure is seductive, but not when it ends up costing us all way more than it should. I have a household of four – and I sure don’t have two grand laying around to fork over for this….

Who says flatlanders are dumb? Illinois residents will get many of the jobs and other related benefits, but they won’t pay any of the $3 billion we’re forking out to Foxconn. Check Robert Reed’s column in the July 30 Chicago Tribune.

@Bill Kurtz
I was thinking the same thing when it was mentioned the location may be Kenosha. Illinois residents will be employed at the campus, but without having to pay for any of the corporate welfare.

A good analogy is paying ransom for return of hostages. Once you pay one time, every occurrence thereafter will generate ransom demands. And even if you agree to pay the ransom, there’s no guarantee these companies aren’t going to come back with additional demands before any real jobs are created.
And what of existing employers. Will Kohls and Harley Davidson want their $3 billion just to keep jobs in the state?

Of course politicians love these deals because they all get campaign contributions with every deal signed, allowing them more time in office.

The majority of the unskilled jobs would be in the $10-12/hr. range, $20,000 to $24,000, and not the average shown of $53,000 in news articles. A $3 Billion handout to a foreign company is insane. This company will take their profits right back to Taiwan.

Jobs are great to have but not when citizens and businesses have to pay billions in tax dollars for corporate welfare, while road fall apart, public workers take 15% permanent wage cuts, and billions defunded from K-university education. This would be like WI taxpayers paying the wages of Foxconn employees for the next 15-years.

The Lefties on this site cost us Kimberly Clark and lots of other businesses, and billions in overspending for nothing.
This deal is the future fro SE Wisconsin. Thank God the Left is not in charge and the leaders have few brains cause place would be Illinois.

If Foxconn paid $10/hour they would not have any employees. We do need jobs for the people in the inner city that the left has ignored and keep in bondage, so they would vote for them.
The Left is apoplectic the these people will get decent jobs, buy cars, homes and vote them out of office.
Look at the biggest city in Wisconsin, one big failure in crime, roads, human trafficking, youth unemployment, poverty, car jackings, car theft,heroin epidemic.
This is the leadership that these people on this site provide.

White, male, liberal, racists that could not run a whorehouse in the Yukon at the height of the gold rush.

Bill, Adam and Bob. tens of thousands of Wisconsinites work in Illinois. The State of Illinois recoups that tax lost from the State of Wisconsin. So your argument does not work. If neighboring states are going to take Fox Conn jobs those neighboring states will have to pay Madison.

Jason
Usually when the benefits of these deals are calculated, they take into account that the workers will also pay local taxes via owning or renting, spend dollars in the community for food, services, etc and the benefit of other jobs created in the community in grocery stores, restaurants and what all. So it’s great that the state gets their share of income taxes but that’s a small part of the big picture.

The left has a problem with giving state subsidizes to Foxconn so they can bring 10,000 family sustaining manufacturing jobs but has no problem with subsidizing health insurers under Obamacare and expanded Medicaid with Federal money.

Bruce has done his usual thoughtful job of setting forth and analyzing the issues. Of necessity, some of his conclusions and assumptions are subjective and speculative.

I would rate as zero the chance that there will be a legitimate public discussion in Madison of the kind Bruce offers.

One of Bruce’s strong points is that Governor Walker approached this “negotiation” with little or no bargaining power. Still, if the elusive but real “multiplier effect” we all learned about in Econ 101 holds true, the benefits of the deal could outweigh the costs.

The only safe bet IMO is that the deal will be approved and we all will get a chance to measure and assess its impact in coming years.

There is a shuttered K-C plant 10 miles from where I sit. Anytime wcd wants to debate why K-C corporate moved to TX years ago I’ll gladly take up the challenge. And I’ll use facts. That may confuse wcd, but that’s the way I roll.

Well, palin couldn’t really see russia, so she was lying. I’m not. There is a former K-C plant 10 miles from here, and I’ll debate both you and wcd on why they boogied. And unlike wcd, I’ll use facts. If you feel like you have a better argument, bring it on.

Look, we all know the Foxconn package will be passed by the Legislature with few or no changes. The most substantive change will likely be that the Assembly will adjust the I-94 state bonding to require a dollar-for-dollar match with dedicated federal funds, since DOT revealed at the hearing that the current bill doesn’t actually require a specific federal amount.

Regardless of what one thinks of a deal like this, the people who are making the decision will be out of office (and possibly out of state) long before the majority of the bill comes due. That’s one of the fundamental flaws of business incentive packages and this one in particular. The money won’t really start flowing in or out of the state coffers for 18-36 months and then will continue for a couple of decades. The commitments in this package will create an obligation for 10 or more state biennial budgets to come.

A more honest approach would be an upfront, one-time package of infrastructure funding and other start-up needs that hits the budgets that these decision makers will deal with – not the budgets that will hit in 2030 and beyond.

old baby is claiming to have facts — inside information if you will — about why K-C corporate moved to Texas. I’d like to hear what these facts are, yet he refuses to provide any. Saying you have facts is not the same as actually presenting them.

If you weren’t so intellectually lazy, I’d suggest reading posts #17, 19 and 23 for yourself.

Spend a little little time reflecting on your own comments before expecting anything else from others. A friendly suggestion. This whole thing started because you misinterpreted old baldy’s comment and chose to mock him for it.

That’s the nut of your misunderstanding. He mentioned his proximity to the former Kimberly Clark plant as coincidental, not as the source of his knowledge of why it closed. You invented that connection and turned it into sarcasm towards him. It all started because of your weak comprehension skills.

If you feel you’re being condescended to, take it as a reflection of your own comments to others.

with the discussions from UW and Marquette, the businesses, the Foxconn deal will rejuvenate all of SE Wisconsin with housing, retail, new ancillary business, associated business and put numerous minorities to work. Our team will hand out lemons next election at the polls with the Dems name on them.